Risk assessment

Activity driven by external trade and private consumption

In 2017, growth is expected to remain moderate driven, notably, by strong external trade and private consumption. Agrifood exports are projected to benefit from increased agricultural output thanks to the dissipation of the El Nino phenomenon, which hit harvests in 2016. Manufacturing exports (especially textiles) are still expected to benefit from preferential access to the US market. Private consumption is also projected to grow, thanks to increased household purchasing power due to lower inflation and the continuing strength of remittances from migrants. Private investment is, by contrast, likely to remain relatively weak due to the government's difficulties in passing the reforms necessary to fight corruption and to crime levels affecting the business climate and reducing the country's attractiveness. The lack of consensus within the political class because of the fragmentation of the political parties is hampering public investment projects, for which invitations to tender are regularly postponed or ineffectual (lack of interest). Finally inflation is expected to decline in response to the expected drop in food prices, thanks to expectations of good harvests during the year and to the stability of the local currency, the quetzal.

The government is likely to opt for a cautious fiscal policy in the face of weak revenues

Guatemala's tax receipts are among the lowest in Central America. Despite the efforts made to increase them (such as the tax reform approved in 2012 and designed to bring in additional revenue), widespread corruption and poor management of public agencies (in particular customs and taxes) continue to undermine State revenue collection. Powerful lobbying by the influential private sector, unwilling to accept higher taxes, moreover limits the government's room for manoeuvre. As a result, the reforms proposed in summer 2016, such as corporation and fuel tax hikes, were withdrawn from the political agenda after the furore this created among businesses. New proposals are being studied, including a gradual increase in VAT, which should be put before Congress during the first quarter of 2017. Given the difficulty in boosting State resources, the authorities are implementing a cautious fiscal policy aimed at preventing an increase in the public debt. However, this limits plans for public action on social spending and investment in a country where poverty still affects almost half the population.

The current account deficit is expected to remain small, thanks to a rise in exports despite the modest recovery in energy prices

The current account deficit results from the trade deficit as Guatemala's imports account on average for one and a half times the value of its exports. Purchases abroad of capital goods and commodities (plastics, textiles) support the country's export capacity, especially that of the textile and food industries. The modest rise in the import costs of oil should be offset in part by higher agricultural exports (sugar, coffee) the output and price prospects of which have improved. The transfer balance surplus, thanks to remittances by Guatemalan emigrants living for the most part in the United States, helps, meanwhile, to limit the growth in the current account deficit. These steadily increasing remittances were estimated at almost 10% of GDP in 2015. In contrast, the balance of services and income is still in deficit, notably because of transport costs and dividend repatriation by foreign companies.

Political fragmentation slows the pace of reforms

In power since January 2016, President Jimmy Morales and his Frente de Convergencia Nacional (FCN) government seem incapable of passing major reforms on taxation and of fighting corruption. The new president's lack of political experience is a significant obstacle to negotiating reforms in a very divided political environment, with Congress very fragmented (no party has even 20% of the votes) and the political alliances set up in favour of the government are now threatened by allegations of corruption surrounding the president's close family. The risk of renewed popular unrest, which precipitated the departure of former President Molina, is still high, therefore, especially as the president's popularity is steadily declining. The business climate is set to remain mediocre, affected by political instability, corruption and insecurity.